It's fairly obvious that commodity prices are important when evaluating an exploration and production company, and nowhere is the importance more evident than when analyzing the industry's year-end reserve reports.
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The Securities and Exchange Commission (SEC) mandates that exploration and production companies report a metric known as the standardized measure of discounted future net cash flows. This is the present value of the cash flow that a company's proved reserves will generate after taking into account production and development costs and taxes.
Companies also report a non GAAP measure known as the PV-10 value, which represents the net cash flows that these proved reserves will generate, discounted at 10%. A company will typically calculate this measure using the average monthly prices over the preceding year, and will also present an alternative valuation using higher commodity prices.
Denbury Resources (NYSE:DNR) recently reported its proved reserves for 2010 and reported a PV-10 value of $7.3 billion for these reserves using an oil price of $74.36 per barrel and $4.29 per Mcf for natural gas.
The company also reported an alternative value for its proved reserves of $9.4 billion using higher commodity prices based on the futures market. These prices were $87.31 per barrel for oil and $5.46 per Mcf for natural gas.
Denbury Resources went one step further in helping by disclosing the sensitivity of the value of its reserves to various commodity prices. Every one-dollar change in oil prices would result in a $146.5 million change in value. The value would fluctuate by $10.8 million for every ten-cent change in natural gas prices. This sensitivity only applies to small changes in prices because a large change might force the company to recalculate the amount of its proved reserves.
Not all exploration and production companies provide this level of detail. Pioneer Natural Resources (NYSE:PXD) reported proved reserves of 1.011 billion barrels of oil equivalent at the end of 2010. The company reported the PV-10 value of these reserves at $8 billion, and the standardized measure at $5.4 billion.
Unit Corporation (NYSE:UNT) reported proved reserves of 622.2 Bcfe at the end of 2010, and calculated the PV-10 value at $1.3 billion and the standardized measure at $900 million. Concho Resources (NYSE:CXO) reported year-end proved reserves of 323.5 million BOE disclosed a PV-10 value of $6.1 billion.
All of these companies used the lower SEC prices to calculate the PV-10 value and no alternative value using higher commodity prices was disclosed.
The Bottom Line
The exploration and production industry reports the value of its proved reserves using the government mandated commodity pricing, and an alternative value using higher futures prices for oil and natural gas. This makes it easier for investors to see the impact of commodity prices on the value of these reserves. (For additional stock analysis, see Natural Gas Forecast.)
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